Chipotle’s latest quarter shows strong growth. Discover why Chipotle remains a top long-term investment opportunity.
Aug. 19, 2024
Chipotle Mexican Grill continues to defy expectations, proving that even after years of growth, the fast-casual giant has plenty of room to run. In this quarterly check-in, we’ll dive into Chipotle's latest earnings and explore why the company remains a strong long-term investment, drawing on insights from respected investor Bill Mann.
A Strong Quarter with Impressive Numbers
Chipotle’s latest earnings report has left analysts and investors thoroughly impressed. The company reported an 18.2% increase in revenue year-over-year, driven by a combination of same-store transaction growth of 8.7% and a 2.4% increase in the average check size. This growth is particularly noteworthy considering the broader challenges facing the restaurant industry, including inflationary pressures and supply chain disruptions.
Digital sales continue to play a crucial role in Chipotle’s success, now representing 35% of total revenue. This shift towards digital has allowed the company to innovate with its Chipotlanes—drive-thru outlets designed exclusively for digital orders. Of the 52 new restaurants opened this quarter, 46 were Chipotlanes, bringing the total restaurant count to 3,479. These locations are not only more efficient but also more cost-effective, reducing staffing and real estate expenses while boosting operating income to 19.7% of sales, up from 17.2% a year ago.
The Power of Digital and the Chipotlane Advantage
One of the key drivers behind Chipotle’s rising margins is its focus on digital sales and the expansion of Chipotlanes. These drive-thru outlets are revolutionizing the way Chipotle operates by streamlining the ordering process and cutting down on operational costs. The efficiency of these locations is allowing Chipotle to expand rapidly, with plans to add 285 to 315 new units by the end of the year.
The strategic emphasis on digital sales and Chipotlanes highlights Chipotle’s ability to adapt to changing consumer behaviors while maintaining profitability. The company's innovative approach not only sets it apart from competitors but also positions it well for future growth as it continues to open new locations across the U.S.
Addressing Portion Concerns and Enhancing Customer Satisfaction
Recently, Chipotle faced some criticism on social media regarding portion sizes, with some customers claiming they were being shortchanged. In response, Chipotle’s CEO, Brian Niccol, addressed these concerns directly during the company’s earnings call. He emphasized that the company has not reduced its portion sizes but acknowledged that there were some inconsistencies. To address this, Chipotle has re-emphasized training and coaching across all restaurants to ensure that customers receive the generous portions that are a core part of the brand's identity.
This proactive approach not only reassures customers but also reflects Chipotle’s commitment to maintaining its brand equity, even if it puts slight pressure on profit margins in the short term.
Long-Term Growth Potential: International Expansion on the Horizon
While Chipotle’s growth in the U.S. is impressive, what’s even more exciting is the company’s untapped potential in international markets. Currently, Chipotle operates primarily in the United States, with only a few locations abroad, including two in London, one in Paris, and a recently announced store in Kuwait. However, the company has ambitious plans to double its store count to 7,000 over the next decade, signaling significant growth potential both domestically and internationally.
This long-term vision, combined with strong pricing power—demonstrated by the company's ability to raise prices without hurting demand—makes Chipotle an attractive option for investors looking for a company with a clear path to sustained growth.
Valuation: A Premium Worth Paying?
With a price-to-earnings (P/E) ratio of 48, Chipotle is certainly trading at a premium. However, this valuation is lower than it was during the 2020 pandemic stock rush and is also below where it stood just a few months ago. Given Chipotle’s consistent ability to deliver strong results, this premium may be justified.
As Bill Mann suggests, Chipotle’s blend of innovation, strong brand identity, and growth potential makes it a compelling addition to any portfolio. Its ability to navigate challenges and continue growing is a testament to the strength of its business model. For long-term investors, Chipotle’s track record suggests that it’s a stock worth holding onto.
Bill Mann’s Perspective: A Lesson in Long-Term Investing
Bill Mann, a respected figure in the investing world, has long highlighted Chipotle as a prime example of the power of long-term investing. He often references Chipotle when discussing how great investment opportunities can be found in the businesses we encounter in our everyday lives—a concept popularized by Peter Lynch.
Mann likes to tell the story of how, if you had told business school students 30 years ago that a burrito chain could compound revenue at 20% annually for decades, they would have laughed. Yet, Chipotle has done just that, demonstrating that even the most unlikely companies can become investment powerhouses.
He emphasizes that Chipotle’s success is due to its ability to consistently execute its business model, adapt to market changes, and maintain a strong connection with its customers. Even after facing significant challenges, such as the E. coli outbreak in 2015, Chipotle has not only recovered but reached new heights. Mann believes that this resilience is a key trait that makes Chipotle a standout long-term investment.
Mann also points out that while Chipotle’s valuation has often been considered high, it is justified by the company’s consistent performance and future growth prospects. For Mann, Chipotle exemplifies how long-term investors can benefit from identifying high-quality businesses early and staying the course.
Conclusion
Chipotle’s latest quarter serves as a reminder of why the company has been such a strong performer over the years. With robust growth in the U.S., exciting international expansion plans, and a focus on innovation through digital sales and Chipotlanes, Chipotle is well-positioned to continue delivering value for investors. As Bill Mann highlights, Chipotle is not just a burrito chain; it’s a long-term investment success story that continues to reward those who recognized its potential early on.
Should you invest $1,000 in Chipotle right now?
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